macro highlights€¦ · our outlook of the week: when corporate earnings line up with macro trends...
TRANSCRIPT
PRIVATE BANKING
ECONOMIC RESEARCH TEAM
EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK 1/8
MACRO HIGHLIGHTS WEEK OF 25 JULY 2016
OUR HIGHLIGHTS:
Our outlook of the week: When corporate earnings line up with macro trends
Corporate earnings have plateaued in the past few quarters, in step with the macroeconomic scenario. They could find support in GDP growth, which we still expect to be around 2%.
Emerging-market focus: Political limbo in Turkey following the failed coup
Turkey has been caught up in a cloud of political uncertainty for some time now. Domestic assets will remain under pressure, although another overthrow attempt seems unlikely.
OUR OUTLOOK OF THE WEEK: WHEN CORPORATE EARNINGS
MEET UP WITH MACRO TRENDS
By Lisa Turk, Economist, US, [email protected]
Corporate earnings in the USA have plateaued in recent quarters, in line with the macroeconomic scenario (see
left-hand chart). EPS figures across the board are slightly lower in 2016 than they were in 2015.
MACRO HIGHLIGHTS | 25 JULY 2016
2/8 EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK
A number of macroeconomic factors are behind the soft earnings cycle in the past few months:
- a tight job market, which pushes up the wages paid by companies,
- productivity that continues to decline (see right-hand chart on the previous page), and
- lower potential GDP growth since the financial crisis, at only 2%, versus 3% between 1990 and
2007. The impact of this lower growth level is clearly reflected in sales and earnings figures.
Historically, aggregate corporate earnings tend to track GDP growth (see left-hand chart below).
Preliminary indications that the job market is saturated suggest a late-cycle economy in the USA. But
corporate earnings growth could find support over the next few quarters in GDP growth, which we
forecast at 1.9% for 2016 and 2.2% for 2017 (bracketing the potential growth level of 2%). We expect
economic activity to be fuelled by the property sector and solid consumer spending. But even if
earnings remain firm, capital spending and wage increases will be contained – companies are focusing at
this point on paying out a dividend and buying back their own shares (see right-hand chart above).
MACRO HIGHLIGHTS | 25 JULY 2016
EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK 3/8
OUR RESEARCH FOCUS: POLITICAL LIMBO IN TURKEY
FOLLOWING THE FAILED COUP
By François Léonet, Economist, Emerging countries, [email protected]
President Recep Erdogan and Prime Minister Binali Yildirim remain in place following the aborted military
coup. The overthrow attempt met with little support from the people, who filled the streets in a show of
defiance against the plotters. The experience served to strengthen President Erdogan and legitimise
his efforts to modify the constitution from a parliamentary democracy to a presidential democracy.
Such a change would give the president broader decision-making authority.
Private consumption accounts for 72% of Turkey’s GDP
Tourism revenues are down
The government quickly regained control over the situation, but the political uncertainty is not over. It will
affect the country’s growth outlook and the valuation of domestic assets, with investors demanding more in
terms of risk premium. While the coup attempt was not expected, it is not an isolated event. Turkey has
been fraught with political tensions for a long time. These tensions are evident at the international level
(exposure to the political situation in the Middle East, likelihood of further terrorist attacks and the country’s
role in the migrant crisis in Europe) and domestically (constitutional amendments desired by the AK Party,
the chance of early elections and the Kurdish dilemma).
These sources of instability weigh heavily on investment decisions concerning a country whose net
foreign asset position is one of the weakest among the major economies. The government’s
declaration of a three-month state of emergency and the spiral of arrests – mainly among civil servants,
judges and teachers – create institutional uncertainty that will complicate economic matters and hold back
investment. Nor will these developments help get the tourism sector – 4% of GDP and a key source of
foreign currencies – out of its current rut (see right-hand chart above).
MACRO HIGHLIGHTS | 25 JULY 2016
4/8 EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK
Turkey’s current account balance has long been a concern
Lower confidence weighs on consumer spending
The current account deficit has improved recently but remains high at 4.1% of GDP. This means that the
country depends on foreign financing, which is mainly in the form of foreign bank loans along with bond
flows (see left-hand chart).
While the consequences of the coup attempt remain to be assessed, the Central Bank of the Republic of
Turkey (CBRT) reacted carefully by moderating its reflationary monetary policy. It trimmed its
overnight lending rate by only 0.25% to 8.75%, which is a smaller cut than in recent months (-0.5%). The
decision to keep key rates relatively high was aimed at stabilising the lira, which is needed to ensure
foreign capital inflows. This monetary tweaking seems judicious given the low chances of another
overthrow attempt. The upper ranks of the Turkish military were not involved in the coup, and the scope of
arrests and suspensions – some 60,000 people are said to be affected – is certainly dissuasive. Once
current tensions abate, selling pressure on the lira subsides and capital flows stabilise, the central bank will
resume its monetary policy cycle.
Persistent worries and a shortage of foreign capital flows would eventually have a negative impact. The
CBRT cannot afford to keep interest rates high for too long because of the dampening effect on private
consumption and demand for credit. The low level of foreign currency reserves limits the scope for open-
market operations, while high external debt is another constraint. This scenario would call for a significant
cut to interest rates in order to boost domestic economic activity. Forex would be the adjustment variable in
this case, as a sharp drop in the lira would spark inflation, cut into consumer spending and directly threaten
GDP growth.
The shock of uncertainty following the coup attempt is bound to disappear sooner or later. That said,
international investors will probably require a higher return to hold Turkish assets, as the political risk will
MACRO HIGHLIGHTS | 25 JULY 2016
EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK 5/8
remain more acute for a long time to come. President Erdogan’s ability to bring the situation under
control was good news, but his insistence on expanding his own decision-making authority is
fuelling fears of authoritarianism. This will destabilise the business environment and lead to a
decrease in investment in the country.
Private debt rose sharply
Emerging markets: some examples of real returns
Domestic assets are therefore expected to remain under pressure. Real returns on the bond market,
for example, are certainly attractive compared to those of developed countries but are not much better than
what can be found in other emerging countries with lower political risk. The boom in private debt in recent
years raises two important questions – that of refinancing the loans and bad debts – especially since the
banking sector accounts for 41% of the domestic stock index (see left-hand chart). Unfavourable comments
by the rating agencies will not help matters.
AFTER SHORT SUMMER BREAK, WE WILL RESUME PUBLISHING THIS REPORT ON 22 AUGUST
MACRO HIGHLIGHTS | 25 JULY 2016
6/8 EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK
ECONOMIC FORECASTS
Contributions to global GDP growth
Comments The GDP growth rates shown above are actual for 2015 and projections for 2016 and 2017. Each country’s weighting is based on its GDP in US dollars as calculated by the World Bank. Contributions to global expansion are calculated by multiplying the GDP growth of each country by its weight. The sum of the
contributions works out to 3.2% for 2016, a good estimate of this year’s global GDP growth.
Economic Activity GDP 2015GDP 2016Economist
Estimates
GDP 2017Economist
Estimates
Country
Weights
Contribution
2016
United States 2.4% 1.9% 2.2% 23.6% 14.5%
Canada 1.2% 1.3% 2.0% 1.9% 0.8%
Euro Area 1.5% 1.5% 1.2% 14.5% 7.0%
Germany 1.5% 1.5% 1.3% 4.2% 2.0%
France 1.1% 1.4% 1.1% 2.9% 1.3%
United Kingdom 2.2% 1.5% 0.5% 3.5% 1.6%
Switzerland 0.8% 1.0% 1.5% 0.7% 0.2%
Russia -3.7% -0.8% 1.3% 1.6% -0.4%
Japan 0.6% 0.5% 0.8% 5.1% 0.8%
China 6.9% 6.5% 6.3% 18.4% 38.6%
India 7.4% 7.5% 7.7% 3.4% 8.3%
Brazil -3.7% -3.5% 1.0% 1.9% -2.1%
Mexico 2.5% 2.4% 2.7% 1.5% 1.2%
Others 3.9% 4.8% 6.0% 16.7% 26.1%
WORLD 3.1% 3.1% 3.4% 100% 100%
Source : Bloomberg M omentum (vs Last Est imates) Performance (Over \ Under)
MACRO HIGHLIGHTS | 25 JULY 2016
EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK 7/8
RETURNS ON FINANCIAL ASSETS
Major benchmarks and currencies
Markets Performances
(local currencies)
Last
Price1-Week (%) 1-Month (%) Year-to-Date (%) Last Year (%)
Equities
World (MSCI) 412 0.0% 6.3% 4.9% -1.8%
United States (S&P 500) 2'171 0.1% 6.6% 7.4% 1.4%
Euro Area (DJ EuroStoxx) 320 1.0% 6.7% -4.8% 11.2%
United Kingdom (FTSE 100) 6'729 0.2% 9.4% 10.1% -1.4%
Switzerland (SMI) 8'229 0.4% 5.9% -3.8% 1.1%
Japan (NIKKEI) 16'383 0.7% 11.3% -11.8% 11.0%
Emerging (MSCI) 869 0.0% 8.5% 11.3% -14.6%
Bonds (Bloomberg/EFFAS)
United States (7-10 Yr) 1.58% 0.1% -0.1% 6.9% 2.1%
Euro Area (7-10 Yr) -0.03% 0.1% 1.4% 6.3% 1.0%
Germany (7-10 Yr) -0.03% 0.2% 0.5% 7.2% 0.9%
United Kingdom (7-10 Yr) 0.83% 0.1% 2.0% 9.3% 0.7%
Switzerland (7-10 Yr) -0.52% -0.3% 0.0% 4.0% 3.7%
Japan (7-10 Yr) -0.25% 0.1% 0.6% 4.6% 1.4%
Emerging (5-10 Yr) 4.33% 0.0% 3.0% 11.1% 1.6%
United States (IG Corp.) 2.82% 0.1% 1.7% 8.6% -0.8%
Euro Area (IG Corp.) 0.50% 0.2% 1.9% 5.6% -0.5%
Emerging (IG Corp.) 3.62% 0.2% 2.7% 10.1% -2.3%
United States (HY Corp.) 6.63% 0.3% 3.3% 12.9% -3.5%
Euro Area (HY Corp.) 3.47% 0.4% 2.7% 5.5% 0.3%
Emerging (HY Corp.) 7.59% 0.5% 3.1% 14.8% 3.6%
United States (Convert. Barclays) 46 0.8% 6.2% 7.1% -0.8%
Euro Area (Convert. Exane) 7'237 0.6% 2.3% -3.5% 7.6%
Real Estate
World (MSCI) 210 1.5% 7.6% 12.7% 1.0%
United States (MSCI) 225 1.3% 7.6% 14.3% 4.6%
Euro Area (MSCI) 233 3.5% 8.7% 14.8% 16.1%
United Kingdom (FTSE) 6'428 0.0% -3.4% -2.5% 9.4%
Switzerland (DBRB) 3'864 0.2% 3.3% 7.7% 4.6%
Japan (MSCI) 246 2.0% 7.9% -7.9% 0.9%
Emerging (MSCI) 104 0.7% 8.1% 7.1% -6.8%
Hedge Funds (Dow Jones)
Hedge Funds Industry 541 n.a. -0.1% -1.6% -0.7%
Distressed 727 n.a. -0.5% 0.0% -5.3%
Event Driven 578 n.a. -0.5% -2.5% -6.3%
Fixed Income 302 n.a. -0.5% -0.2% 0.6%
Global Macro 871 n.a. 0.7% -1.5% 0.2%
Long/Short 643 n.a. -1.9% -5.0% 3.6%
Managed Futures (CTA's) 323 n.a. 4.2% 2.0% -0.9%
Market Neutral 260 n.a. -2.5% -3.5% 1.7%
Multi-Strategy 525 n.a. -0.1% 0.7% 3.8%
Short Bias 29 n.a. -1.4% -7.2% 2.4%
Commodities
Commodities (CRB) 420 -2.4% -0.6% 10.9% -15.2%
Gold (Troy Ounce) 1'320 -1.0% -0.2% 24.3% -10.6%
Oil (Brent, Barrel) 43 -5.1% -7.6% 21.3% -35.9%
Currencies
USD 97.1 0.1% 1.8% -1.5% 9.3%
EUR 1.10 -0.3% -0.3% 1.2% -10.2%
GBP 1.31 0.1% -0.7% -10.9% -5.4%
CHF 0.99 -0.6% -1.3% 1.0% -0.8%
JPY 104.7 1.3% -2.6% 14.8% -0.4%
Source : Bloomberg Momentum (1-week / 1-month / 3-month) Performance (Negative \ Positive)
MACRO HIGHLIGHTS | 25 JULY 2016
8/8 EDMOND DE ROTHSCHILD | FRANÇOIS LÉONET, LISA TURK
EDMOND DE ROTHSCHILD (SUISSE) S.A. Rue de Hesse 18 – 1204 Geneva - T. +41 58 818 91 91 Rue de Morat 11 – 1700 Fribourg - T. +41 26 347 24 24 Avenue Agassiz 2 – 1003 Lausanne - T. +41 21 318 88 88 Via Ginevra 2 – 6900 Lugano - T. +41 91 913 45 00 Beethovenstrasse 9 – 8002 Zürich - T. +41 44 818 81 11 WWW.EDMOND-DE-ROTHSCHILD.CH
Disclaimer
This brochure was prepared by Edmond de Rothschild (Suisse) S.A., 18 rue de Hesse, 1204 Geneva, Switzerland. Edmond de
Rothschild (Europe), located at 20 boulevard Emmanuel Servais, 2535 Luxembourg, Grand Duchy of Luxembourg, and subject
to the supervision of the Luxembourg Commission de Surveillance du Secteur Financier (CSSF), and Edmond de Rothschild
(France), a société anonyme (public limited company) governed by an executive board and a supervisory board with capital of
EUR 83,075,820 and with its registered office at 47 rue du Faubourg Saint Honoré, 75008 Paris, subject to the supervision of
the French Autorité de Contrôle Prudentielle et de Résolution (ACPR), limit themselves to making this brochure available to
clients at their offices and branch offices.
The figures, comments, analyses and investment research contained in this brochure reflect the opinion of Edmond de
Rothschild (Suisse) S.A. on market trends, formed on the basis of its own expertise and the economic analyses and the
information in its possession at this time. The figures, comments, analyses and investment research contained in this brochure
may no longer be current or relevant when the investor reads this brochure owing to its date of publication or changes in the
markets.
Each analyst mentioned in this document certifies that the views expressed about the evaluated companies and securities
reflect the analyst's personal opinion. Their remuneration is not tied directly or indirectly to the specific recommendations and
opinions expressed in this document. Details on the rating methodology used by Edmond de Rothschild (Suisse) S.A. are
available free of charge on request.
Neither Edmond de Rothschild (Suisse) S.A., Edmond de Rothschild (Europe) nor Edmond de Rothschild (France) may be held
liable for a decision to buy, sell or hold based on the aforementioned commentaries and analyses under any circumstances.
Furthermore, neither Edmond de Rothschild (Suisse) S.A., Edmond de Rothschild (Europe) nor Edmond de Rothschild
(France) may be held liable for harm incurred by an investor as a result of the contents or availability of this brochure.
This brochure is intended solely to provide general, preliminary information for the investors consulting it and should not be
used as a basis for any decision to buy, sell or hold.
Edmond de Rothschild (Suisse) S.A. recommends that each investor obtain the different regulatory descriptions of each
financial product before any investment in order to analyse the risk and form his or her own independent opinion, with the
assistance of advisers specialising in these matters if necessary, so as to ensure that the investment is appropriate to his or her
financial and tax situation.
Past performance and volatility are not a reliable guide to future performance and volatility, and may vary over time.
This information may not be used or reproduced in whole or in part.
Copyright © EDMOND DE ROTHSCHILD (Suisse) S.A. – All rights reserved.